Installment loans – loans that allow you to borrow money and pay it back in equal monthly installments at a fixed rate – are a handy personal financing tool when you want to pay off large debts in small, manageable chunks.
The most common type of installment loan is a personal loan, but other examples of installment loans include no credit check loans, mortgages, and auto loans.
What is an installment loan?
Installment loans allow individuals to borrow a set amount of money that is paid out in a lump sum and can be repaid over time. Typically, these loans come with a fixed interest rate and require regular monthly payments that stay the same every month. Part of each monthly payment is applied to the principal amount borrowed and part to the interest on the loan.
Installment loans are different from credit cards or lines of credit, which usually have more flexible repayment terms and variable interest rates – meaning you don’t have a predictable monthly payment. With an installment loan, you always know what to expect when your monthly bill is due.
Types of installment loans
Installment loans come in many forms. While they work similarly, each type has different characteristics, loan purposes, and average interest rates.
A personal loan is money that is provided by a lender and can be repaid in monthly installments over a set period of time at a fixed rate of interest. These loans are available from online lenders, personal lenders, and credit unions.
The proceeds from a personal loan are made available as a lump sum and can be used to finance various needs.
“A personal loan can be a great funding option for consumers looking to budget for a variety of expenses from car repairs to home improvement,” said Mark Victoria, director of unsecured lending at TD Bank. “A very common and effective use of a personal loan is to consolidate credit card debt at higher interest rates.”
The repayment deadlines for personal loans typically range from 24 months to 60 months, but some can be up to 72 months.
Loans without credit check
Often times, no credit check loans are offered by payday lenders who do not check your creditworthiness before lending money. Payday loans are designed to help consumers in an emergency or when they have no other source of credit.
Payday loans are often short term, costly loans. When applying for these loans, your creditworthiness does not matter as your paycheck acts as collateral for the amount borrowed.
When you are approved for a payday loan, you give the lender a post-dated check for the amount borrowed plus any fees. The lender holds this check and gives you cash. On your next payday, the lender will cash the check you provided.
When you take out an online loan, you authorize the company to withdraw the money from your bank account on your next payday once you’ve been paid by your employer.
The payday loan size is smaller than a personal loan, often capped around $ 500, but in some cases the limits are higher.
Another common installment loan is a mortgage. Most common mortgages require homeowners to repay the borrowed money at a fixed rate over 15 or 30 years. Because a mortgage is backed by collateral such as a house or condo, the interest rates tend to be lower.
Auto loans are another popular type of installment loan. Typically, consumers make a down payment on a car or calculate the resale value of their existing car and then use a car loan to fund the remainder of the purchase price. Monthly payments are made to the lenders until the car loan is paid in full.
Advantages and disadvantages of installment loans
The advantages of installment loans may make them an attractive option, but it is important to also consider the potential disadvantages that come with these loans.
Advantages of installment loans
Installment loans have many advantages. Some include:
- Constant monthly payments: Monthly payments stay the same over the life of the loan, making it easier to create a household budget and keep bills paid on an ongoing basis.
- Increase in creditworthiness: Establishing a clean payment history with no late payments on an installment loan will help improve your credit score.
- Refinancing options: If interest rates go down or your credit improves, refinancing into a new loan can be beneficial as it will likely reduce the monthly installments on your loan or the duration of the loan.
Disadvantages of installment loans
When considering taking out an installment loan, you should consider some of the disadvantages:
- Fixed payment: Because installment loans deposit money in a lump sum, you cannot increase the loan amount if you encounter a new financial hurdle or emergency.
- Potentially long payment plan: The payment terms for installment loans can be long. It is important to make sure that you can make payments on time each month for the entire duration of the loan you are agreeing to. Conversely, if you want to repay your loan early, be aware of any prepayment penalties that your lender may charge.
- Can be Expensive for Bad Credit: The interest rate that you get on an installment loan depends largely on your creditworthiness. If your credit rating is below average, you may be denied a loan or offered a high interest rate that makes monthly payments more expensive.
- Possible fees: When interest rates go down, you can opt for another personal loan at a lower interest rate. However, you may have to pay an additional commitment fee to process the loan.
Should you take out an installment loan?
When deciding whether to take out an installment loan, you should weigh the pros and cons. For example, if taking out an installment loan can help you refinance your high-interest debt, taking out such a loan may be a good idea. Additionally, if you prefer a fixed monthly payment, this may be a better option than using a credit card or line of credit.
However, if you have poor credit, taking out a loan may not be a good idea unless you may apply for a lower interest rate with a co-signer with good credit. If you prefer to borrow money as needed, an installment loan is not the best option.
If you decide to take out an installment loan, make sure that you can afford to repay your debts in a timely manner. If you default on a loan, it can cause significant damage to your creditworthiness and affect your ability to access credit in the future.
Where can you get an installment loan
Installment loans can be obtained through a bank, credit union, or online lender. Shopping helps you get the lowest possible fees and interest rates.
Many lenders allow you to apply for a mortgage, car loan, or personal loan online. Personal loans are often approved within a few days, while auto loans and mortgages require a more thorough credit check and creditworthiness check.
“As with all loans, the lender decides whether you qualify based on your income, credit history, and credit experience,” said Todd Nelson, senior vice president, LightStream.
Regardless of what type of loan you are looking for, we recommend that you check the interest rates of a few different lenders before you commit. Many online lenders offer prequalification, in which you enter some information about yourself and your desired loan terms, in order to be able to quickly decide whether or not you qualify for a loan with this lender. Prequalification uses a gentle credit check, which means your credit rating will not be affected.
Alternatives to the installment loan
Installment loans are not the only way to get the money to make major purchases or pay off debts. Here are some other options.
Personal lines of credit
A personal line of credit (PLOC) is a normally unsecured, revolving line of credit account with a variable interest rate. These accounts work much like a credit card. You apply for a certain loan amount and then access the money when needed. The repayments are based on the amount of money used.
Applying for a PLOC does not usually require the provision of collateral, such as B. your house. However, PLOCs are often reserved for consumers with very good credit histories, often those with a credit score of 680 or greater.
Generally offered by community banks and credit unions, credit creation loans are aimed at those who do not have strong, or no or poor, creditworthiness.
With lender loans, you request a certain amount of money from a lender and make monthly payments on the borrowed amount.
However, with a credit creation loan, you will not receive the money upfront. Instead, the lender pays the loan amount into a secure savings account controlled by the lender. The consumer makes fixed monthly payments on the loan for a period of time, and once the entire loan balance is paid in full, the lender releases the money.
The main benefit of a lender loan is that the lender reports timely payments to credit bureaus during the repayment period. Even if you don’t have access to the cash during this time, you will still improve your credit score.
Alternative loans on payday
If you are a member of a credit union, you can also consider an alternative payday loan (PAL). These loans are available to those who have been a member of a credit union for at least a month and typically allow borrowing between $ 200 and $ 1,000 for a period of one to six months.